Limited federalism could still save the euro

Following the most recent EU leaders’ summit, financial markets gained some short-term stability. But the long-term prospects of the euro remain worrying and further reforms are needed to make the single currency viable for many more decades.

The latest decisions taken by the European Council comprise the initial measures needed for a banking union. European banks will soon be governed by a central regulator and they will also form part of a joint deposit guarantee scheme. Moreover, the European Stability Mechanism could now be used to recapitalise weak banks directly.

All these steps could lead to a financial union that many political and economic leaders believe is an essential prerequisite for stabilising the euro and encourage economic growth in the eurozone in the long term. But eurozone troubles have now become too deep to rely on one-off measures to support weak European banks or promote short-term economic activity.

The time may have come to introduce the concept of burden sharing in the economic and political field.

A version of partial federalism may be the most pragmatic way forward in this difficult context where many Europeans are becoming increasingly sceptical on whether the EU can really deliver the kind of economic growth and stability that will make their lives better. It may still be too early to transform the EU into the United States of Europe on the US model but there are other models.

It is unrealistic to expect that the different cultures in the EU member states will suddenly disappear and all EU citizens will accept a super state political structure where most important political and economic decisions are taken by some central governing body based in Brussels. This may not even be necessary.

The first step towards financial federalism has just been taken. With the setting up of a eurozone-wide system of bank supervision, recapitalisation, deposit insurance and regulation, a very significant building block for a stronger eurozone has been created. It needs to be followed by a limited fiscal union.

The levels of taxation and spending need not be established by some EU institution in Brussels. As far as possible, local governments should continue to establish the levels of public income and expenditure as long as they observe strict and supervised rules aimed at ensuring fiscal rectitude.

Similarly, not all national debts need to be pooled in some central Treasury and managed accordingly. There are already some sensible suggestions to pool all debt that is in excess of the 60 per cent of GDP benchmark that is normally accepted as being the maximum manageable level. This pool of excess debt would then be managed actively with the aim of repaying it in full in 25 years.

A limited fiscal union need not include forced harmonisation of taxes, a measure that could put at risk Malta’s competitiveness in the financial services sector. But Malta will benefit from a more stable eurozone as we have a very open economy and depend on our ability to export, especially to the eurozone. Malta’s membership of the eurozone has brought substantial benefits including new investment.

Some loss of sovereignty is a price worth paying to save the eurozone.

The risk to the introduction of limited federalism is the difficult political task of convincing the electorates of the different member states to give up some national sovereignty in return for the economic benefits of more integration.

Limited federalism may be the only pragmatic solution to the prevailing eurozone crisis.